<< If you have a short PUT and then short the stock, should it drop, you keep the premium and make on the stock drop as well..... that's nice. But, should it rise, you have unlimited loss exposure, i.e., you might not be able to play any more. >>
Your argument is essentially equivalent to saying that short selling is more risky than owning a stock long, because a long stock can only go to zero, while if you are short a stock your risk is unlimited since the stock price can go to infinity. I have no disagreement with this argument on a purely theoretical basis.
IMO this argument applies only to that class of investor who is unwilling or unable to control his losses. Just as there are speculators who will short a stock and continue to hold a short position indefinitely while the stock skyrockets, there are "investors" who will buy a stock and continue to hold the stock long while the stock drops, and drops, and drops, and bad news comes out, and it drops some more and eventually disappears. You may say, yes, but his loss was limited. I agree. It was limited to losing all the money paid for the stock. I have known people who have done this and perhaps you have too.
On the other hand, there are many types of stocks. Stocks can be flighty, stodgy, exciting, dull, boring, highly volatile, risky, have enormous potential, be screaming bargains, be long term B&H, be short term speculations, be trading vehicles, be tremendous long term growth vehicles, be unappreciated, be totally ignored, etc. etc. And yes, sometimes (although holders of some of the huge winners of the last year or so, e.g. Qualcomm may disagree), stocks can also become hugely overvalued. And sometimes they occasionally actually go down.
Now I submit that there are stocks that are appropriate for the covered call type of investor. There are others that writing covered calls on simply results in limiting your gains. Successful investors presumably can tell the difference.
I also suggest that there are certain volatile stocks that have characteristics that would make them good short sales. When these stocks also have extremely high option premiums, then IMO it is just as logical to attempt to put time on your side (which is one of the key attractions to any option seller, to capture premium and put time on your side) by shorting the stock and writing a put, as it is to do a buy/write in attempting to profit by a long stock/short call position. It is further my opinion that if this is done with proper timing, using suitable issues, with a recognition of possible loss and a willingness to control those losses if circumstances make it appropriate, that this is no more risky than the buy/write. Several such situations have occurred in the last few months that have made such an approach quite profitable. Apparently you disagree with this approach. You are certainly free to do so.
Finally, as I have posted before, and here repeat, that at least in the case of Charles Schwab, qualified margin accounts that are not authorized to sell naked options are authorized to short stocks and sell puts against those short positions. (This does not imply in any way that that policy is standard with other brokerage firms.) I can only assume that, therefore, they do not consider such positions to be "naked".
You have now commented twice on the strategy herein described. In the interest of not wanting to bore the followers of this message board if you would like to continue the discussion may I suggest that we do it via private message.
BP |
